Benefits, ACA & the Emergence of DC Accpetance

But for employers, it’s not just a matter of cost-control

by James V. Gemus

Mr. Gemus is Senior Vice President of the Group Life and Voluntary Benefits, Prudential Financial, Inc. He has overall responsibility for the Life Insurance segment of Group Insurance and the Group Voluntary Benefits business. In addition, Gemus is also responsible for PruBenefit Funding (non-qualified benefits).


In August and September 2013, The Prudential conducted its Eighth Annual Study of Employee Benefits: Today & Beyond. A key finding was that the U.S. Supreme Court’s 2012 decision to uphold the Affordable Care Act (ACA) continues to influence employers, employees and brokers’ actions and outlooks. Here are some of the study’s major findings.

Growing Interest in DC Benefits Model

Even with the delay of an important provision of the ACA for large companies, employers have started to make changes to their benefits programs and contribution models. We asked employers if they are moving to, or considering a move to, a defined contribution (DC) benefits model. In this model, the employer gives each employee a predetermined lump sum benefit. The employee then decides how to allocate his or her funds among the available benefit options. Employers’ responses indicate widespread interest in the DC model. A sizeable portion of employees report having already moved to this model or are currently implementing this type of program. Additionally, many of those that are likely to move to an exchange and those that are currently considering participating in an exchange believe they will adopt this model in the next two years.

Employers cite several motivations for adopting this approach. Over half have the goal of lowering health care costs. It’s not just a question of cost control, though: 40 percent of employers want to give their employees greater choice in how they allocate their benefit dollars. That desire reflects a widely held view that giving employees benefits they value is critical for effective recruitment and retention.

Voluntary Benefits’ Increasing Appeal

A significant number of employers agree that providing a balanced mix of health insurance, retirement, and group benefits, including voluntary benefits, is important to their companies’ success. Attitudes toward voluntary benefits vary with company size, however. Larger employers (with more than 1,000 employees) hold the view that “voluntary benefits help maintain the competitiveness of your benefits program while adding little/no costs to your company” more than smaller employers (48 percent versus 38 percent for employers with fewer than 1,000 employees).

Both employers and brokers expect increased demand for and participation in voluntary products. Over half of employers say they are currently implementing or have already implemented offering more voluntary products, which is a significant increase over the 32 percent response in 2012. Cost continues to be the biggest perceived advantage of voluntary benefits from employers’ perspective. Roughly half say they have been successful in achieving their desired cost savings as a result of implementation—up from 28 percent last year.

More brokers expect demand for voluntary plans to increase as employers and employees become more aware of their benefits. In fact, about two-thirds of brokers expect that demand for voluntary benefits will increase over the next five years. Seven in 10 brokers believe that selling voluntary benefits brings better business results as well as higher employee satisfaction.

Employees’ Perspective

Employees recognize the financial challenge their employers face in providing health care benefits because many have experienced rising out-of-pocket expenses due to cost-sharing measures. They know more change is coming: Fifty-five percent of employees feel that employers will have to develop new strategies for covering health care costs; the same percentage believe that their costs will increase. Some strategies concern employees. Forty-four percent believe fewer employers will offer health insurance, a 13 percentage point increase from 2012, and 38 percent of those employees think their employer will drop coverage.

In general, female employees and older employees have more positive views of voluntary benefits versus their respective counterparts

For almost three-quarters of employees surveyed, the offer of voluntary benefits increases the value their company’s overall benefits program, up from 63 percent in 2012. The number of employees interested in having their employer offer more voluntary benefits has also grown to 43 percent in 2013 from 34 percent in 2012.

Employees consider cost as the biggest advantage of the voluntary option, followed by convenience and enrollment without a medical exam. In general, female employees and older employees have more positive views of voluntary benefits versus their respective counterparts. We observed similar patterns on the advantages of voluntary benefits among those who own more products, especially disability products.

Health care exchanges will play a growing role in health insurance distribution and most employees report having neither a favorable nor unfavorable opinion toward both public and private exchanges. There is a significant knowledge gap, however. About one-third of employees report they have heard of but know little about public or private exchanges while one-in-five say they have never heard of either before the survey.

Brokers’ Outlook

Many brokers think DC benefits plans will result in more dollars being allocated to funding health care (47 percent). Brokers generally have a positive look on how voluntary sales will be affected by DC benefits plans—42 percent think this will lead to more sales and 44 percent think sales will remain the same.

Over the next five years, brokers see the biggest help in increasing voluntary sales is that employees have more choices than in the past. Overall, though, these broker-respondents’ answers indicate a mixed outlook:

  • Four in 10 (43 percent) say DC benefits plans will not make a difference in funds allocated to life insurance.
  • Twenty-eight percent think a DC model will result in more dollars allocated to life insurance.
  • Similarly, 40 percent believe DC plans will not result in differences to allocations to disability coverage, while 29 percent think more will be allocated to disability.

Brokers noted that the biggest detriment to higher voluntary benefit adoption is that employees may not fully recognize their own financial needs. Employers agree with that assessment. An employer can attempt to help improve employees’ financial wellness, but offering voluntary benefits as risk-protection measures isn’t enough. If employees don’t understand the financial risks they face and the need for products that protect against the impact of those risks, they may not enroll in the available plans.

Employers recognize the need to educate employees so they get the protection they need. The Study found that:

  • • 58 percent of employers say that they are focused on educating employees about how current benefit offerings can help improve their financial wellness
  • • 56 percent say “helping employees make better benefits decisions” is a very important benefits objective
  • • 55 percent say improving the overall effectiveness of benefits communication is “very important,” making it the highest-rated benefits strategy
  • • 46 percent say “education about the needs addressed by benefits products” was “very important,” and 45 percent say it’s “somewhat important” when asked about the types of assistance employees need when it comes to making their benefits choices

A Business Opportunity

The ACA, in changing the way health care is provided, is creating the opportunity for an evolving group insurance environment. To some extent this trend offers brokers additional means to add value with their consulting.

At the same time, though, ACA-induced changes enable brokers with expertise in voluntary benefits to differentiate their value proposition by focusing more on those benefits and the processes of educating and enrolling employees. That knowledge can have a significant impact on employee participation rates, which in turn enhances an employer’s perception of both the benefits and the broker’s value-added.